Tuesday, January 8, 2013

Some Answers to Hearing Aid Costs

Why are hearing aids so expensive?

Not because of the cost to make them
Premium hearing aids cost around $250 to make (materials, labor, machinery maintenance, etc.). 

Not because of manufacturer selling price
Veterans Affairs buys over 500,000 aids each year for less than $350 each.  Does anyone else buy that many aids in a year?  Costco has 420 hearing aid centers with 320 of them in the United States. The Woodinville, WA center sells between 60 and 100 aids each month. Assuming this is a typical range, all centers sell between 300,000 and 500,000 aids per year worldwide, similar to the VA in volume.  Depending on how well Costco can negotiate, it probably buys their best hearing aids between $350 and $500 each. Those aids are sold for $ 1,300 each.

How much do private practices pay for their aids?  Typically private practices buy from “Buyer’s Groups”.  The Group negotiates prices from manufacturers based on volume sold in that group and resells premium aids to private practices for less than $1000 each.  Typically private practices sell premium aids for more than $3000 each.

Not because of time spent fitting the aids 
According to MarkeTrak VIII, a database formed by the Better Hearing Institute, the average number of patient visits to get hearing aids adjusted properly is 2.74. Add another 2 hours for hearing exam and consultation and we have less than 5 hours total. 

Because the market bears the price under medical duress
Hearing aids cost so much because 20% of the hearing impaired cannot function without them.  How much is it worth to hear, or for your child or parent to hear?  When forced to make this decision, aids are purchased even when prices are very high.  Because there is such a high markup, private practices do not need to sell very many in a year to make good money.  A small practice can sell very few aids per month with a $4000 markup per pair.  Practices push up the prices to make up for few sales. That is one reason why the average price of aids more than tripled in the last 20 years and will continue to increase as long as the market bears the price.  And it is not just a one-time cost.  Hearing aids last an average of 5 years. Practices depend on repeat customers.

Articles that follow in this blog discuss hearing aid issues in more detail:

New Avenues Break the Cost Barrier, an article I wrote concerning buying hearing aids on the web:
Dispenser Sampler
An overview of various retail options for purchasing hearing aids along with their associated price and quality

Dispensing – Profit versus Quantity and Efficiency
A discussion of a hypothetical retail outlet that does very well for its employees and owners while at the same time provides excellent service and quality products to its customers at prices between 25% and 50% currently charged by private practice

Why do Hearing Aids Cost Six times more than an iPad?
The article compares the elements of manufacturing and retail costs of an iPad and Hearing Aid.   The Coauthor Patrick Freuler makes the article more readable by graphics and better organization.

Tuesday, October 16, 2012

Dispenser Sampler

Dispenser Sampler
Ed Belcher

Buying a hearing aid requires many choices.  One can purchase a “hearing aid” for as little as $20 (shipping included!) or for more than $5000 at an audiologist’s practice.  Hearing aids vary a lot in quality.  They may be tiny amplifiers that have a number of distortions and frequency amplification very different from what the user needs.  Or they may be very sophisticated aids that even include features the user may never use.  Hearing aids are sold in private practices, big box stores such as Walmart and Costco, and over the internet.  Each retailer carries aids from a small subset of available manufacturers.  The author went to a number of retailers and was offered, as the best solution for him, very different aids at different prices.

Hardware Apple and Oranges
The quality and features of hearing devices cover a tremendous range from useless to exotic.  A minimum of the following six features need to be considered when matching an aid to a user.  Ask your dispenser to describe how her/his selection works relative to these six areas.

1) Programmable or fixed amplification versus frequency

2) Automatic gain control, Compression and/or manual control

3) Fixed or selectable directivity of microphones

4) Fidelity

5) Feedback Suppression

6) Analog or digital hardware

Sound Amplification Devices versus Hearing Aids
Sound Amplification Devices have a fixed frequency response and most have a manual gain, a single microphone, and no feedback suppression.  The fidelity can be good or bad depending on the engineering quality. Hearing aids have most or all of the elements 1-6 and some have more.  These elements need programming to configure these elements to your hearing needs.

Sound Amplification Devices are legally sold “over the counter” and by direct-mail where as “Hearing Aids” are controlled by state and federal laws requiring specialists to examine your hearing and fit the aids.  However, sophisticated aids are available over the web.  The web vendors generally need an audiogram from the customer to program the aids before shipping.  Getting a good fit and the many elements (some such as feedback suppression) configured for your case remotely may be difficult.

The quality in engineering and the absence or presence of the six features above affect the selling price and of course the utility of the aid to the user. The dispenser’s acquisition cost is generally multiplied from 2 to 3 times to get the selling price. Premium aids generate more profit for the dispenser and provide motivation to move customers to the most expensive aids they are willing to buy.

The following section discusses various ways hearing aids are distributed including Veterans Affairs, European markets, and the U.S.A. commercial sector.

Veterans Affairs
Lucille Beck, Director, Audiology and Speech Pathology Service, Veterans Affairs, reported in 2011 that the VA dispensed 561,212 hearing aids in 2010, 20% of all hearing aids dispensed in the U.S.A. that year.  The average manufacturer cost of a hearing aid to the VA was $348.15.
 Meeting Challenges of VA Audiology Care in the 21st Century

The VA dispensed aids from the following companies on contract in 2009: Interon, Microtech Hearing Technologies, Phonak, Siemens AG, Starkey, and Unitron. The companies are among the best hearing aids manufacturers in the world, and the models purchased are among their best.  Earl E. Johnson, AuD, PhD obtained ratings of these aids from the audiologist staff in the VA. The aids were rated on the following criteria: Digital Signal Processing, Feedback Suppression, Noise Reduction, Wireless Technology (non-FM),   Automatic Functionality,   Data Logging, Acoustic Telephone Program, Music Program, Programming Software, Adaptive Directionality, FM System, Volume Control, Integrated Real-Ear, Telecoil, Protection Devices, Wax Guard Devices, Battery Life, and Remote Control.  Each of the companies’ aids was rated on all of the above features.

Determinants of Department of Veterans Affairs hearing aid brand dispensing by individual audiologists Earl E. Johnson, AuD, PhD , http://www.rehab.research.va.gov/jour/11/487/johnson487.html

Hearing aids are like other technologies. They get better and the manufacturer price drops.  In 2009, 2010, and 2011, the VA paid an average of $359, $348, and $333 per aid respectively.  The amount quoted above for 2009 and 2010 was an average over all aids purchased at the VA.  The 2011 price was from the Phonak contract FY2011-14. The contract was signed in November 2009.  2011 was its first option year. Veterans Affairs can order up to $10 million worth of hearing aids per month through 2014 under this contract.

How do countries in Europe provide and administer hearing aid services?
A 2005 study by The British Society of Hearing Aid Audiologists reported that 90% of the UK and Denmark citizens use public hospitals to evaluate hearing and dispense their hearing aids. There is no charge to the customer for the exam or hearing aid(s), but the waiting times for the first appointment are 47 and 84 weeks respectively!  Most European countries have similar public services but also provide citizens vouchers to help pay for private enterprises to evaluate hearing, purchase, and fit their hearing aids. These vouchers or rebates average between $738 and $1149 per aid, and also allow approximately $245 for the fitting cost.  The aids and service may cost the customer some out-of-pocket expense depending on the chosen aid, but the wait is days versus many weeks.

Non-Veterans (U.S.A)
In 2010, non-veterans purchased 2.78 M aids in the U.S.A. They were dispensed through independent practices, health maintenance organizations, mail-order, and multiple-outlet businesses such as HearUSA, Costco Hearing Centers, and Miracle Ear.

Private Practices
 The author went to a private practice staffed by two Doctors of Audiology, an intern Audiologist, a receptionist, and a bookkeeper.  After the standard procedures of an ear examination, examining a current audiogram, and discussion of needs and preferences, the audiologist proposed the WIDEX Passion 440 ($3,065), Oticon Agil Mini Rite ($2,700), Oticon Pro Mini Rite ($2,170) and Oticon Mini Rite ($2,000).  She had demo versions of the WIDEX and Oticon Agil, fitted the author with both of them, and after he signed papers stating his financial responsibility for the aids, was able to test them at home for up to two weeks. The author’s favorite was the WIDEX but the price seemed ridiculously high when compared to smart phones and other complex electronics.  Many journal papers spanning over decades agreed, and cited that 75% of those in the USA that need hearing aids did not have them. Cost was sited as the most important reason.  This sticker shock started the author’s search to better understand the cost and profits of the manufacturing and distribution systems.

Managed Care – Group Health Corporation
The author is a member of Group Health, a managed care corporation in Washington State.  He got an appointment for a hearing exam and paid $20 copay for the exam.  He needed another appointment for the discussion of needs and preferences, and fitting.  Group Health offers Oticon, Phonak, WIDEX and Starkey. Price ranges are approximately from $1300 to $3000 per device depending on technology level.  Specifically the WIDEX Passion 440 hearing aid is $2760 for one and $5322 for two.  After a trial period, if the customer decides not to purchase the aids, s/he will be refunded all but $300.  A disadvantage was that the closest hearing exam was two months after the author made the appointment and the fitting appointment would have been another two months wait after the exam.

Multiple-Outlet Businesses – Can scale make a difference?
Costco Hearing Centers
Costco has 420 hearing centers worldwide with 360 in the United States. The author went to a center in Woodinville, WA. It has a fulltime licensed Hearing Instrument Specialist and a part-time Audiologist CCC-A, a fulltime receptionist and a part time receptionist. All staff took shifts to operate the center Monday through Saturday.  The center occupies approximately 500 square feet in the large warehouse. Selection of a hearing aid follows the standard procedure of hearing exam, audiogram, discussion of needs and preferences, and a demonstration of selected aids. The specialist programs demo aids and allows the customer to walk around the warehouse. If hearing aids are ordered, there is a 90-day trial period with money back guarantee; a manufacturer’s warranty for the hearing aids (3-yr) and damage or loss (2-yr). The two major brands sold are REXTON (made by Siemens) and ReSound with headquarters in Denmark. These brands have a number of styles. The BTE-RIC (Behind the Ear, Receiver in Canal) style varied in price from $1000 to $1,300 per aid. When an order is placed, the aids are shipped from the manufacturer and ready to fit in 2 days.
The Woodinville center sells between 60 and 100 aids per month. Assuming this is a typical number, Costco sells between 300,000 and 500,000 aids per year worldwide, similar to the VA in volume.  If Costco were to achieve the same deal as the VA ($350/aid cost), the corporate profit from all centers would average $192 million  annually, (41 % of their gross revenue) even when selling hearing aids nearly half the price quoted by private practices, Miracle Ear and HearUSA for similar models.  (See Appendix A for more details on the analysis).

HearUSA has more than 180 Hearing Care Centers nationwide plus nearly 2,000 independently practicing audiologists affiliated with their Hearing Care Network. In some markets, HearUSA may operate as HEARx or HEARx West. HearUSA was a privately owned company that distributed mainly Siemens hearing aids. On September 9, 2011, HearUSA was sold to Siemens through a bankruptcy auction.  According to the employee in Florida helping the author make an appointment, the change in operation was smooth.  Employees went home on Friday and continued their same work on Monday with new owners. Only the CEO and CFO were replaced.  HearUSA provides the AARP Hearing Care program. One calls HearUSA and they verify AARP membership, then make the first appointment to either a HearUSA Center or affiliate near the member.  The program brochures indicate that purchasers obtain a 20% savings on a wide range of digital hearing aids.  The prices for a BTE-RIC after the discount ranged from $1,280 to $2,600 per aid. There are no HearUSA centers in Washington State.  The author was directed to an affiliate private practice located in Mountlake Terrace, WA.  After the ear exam, audiogram, and discussion of needs and preferences, the author was offered two Siemens models and two ReSound models.  The ReSound Alera 9 was priced at $2,600/aid with the 3-yr warranty, 2-yr loss/damage, and life (of aid) adjustment service.

Miracle Ear
Miracle-Ear, Inc. is a network of retail outlets that distribute hearing aids manufactured by M-E Manufacturing and Services Inc. ("MEMSI"), a subsidiary of Siemens Medical Solutions. Miracle-Ear is a subsidiary of Amplifon S.p. A, a worldwide distributor of hearing aids based in Italy.  As of March 2011, Miracle-Ear had more than 1,200 locations in the United States, with many renting space in Sears stores. In 2000 Amplifon sold the manufacturing business of Miracle-Ear, Inc. to MEMSI, a Siemens company, for approximately $3.9 million. Miracle-Ear has an exclusive multi-year agreement with MEMSI for the supply of hearing aids. As a result of the agreement with MEMSI, Miracle Ear began selling rebranded Siemens hearing aids and hearing aid accessories.  After the ear exam, audiogram, and discussion of needs and preferences, the specialist offered the author three BTE hearing aids called ME-1, ME-2, and ME-3 with hollow tubes transmitting sound into the ear canal.    The specialist quoted retail prices ranging from $4390, $3990, and $3590 respectively per aid and with a promotion ranging from $3293, $2992, and $2742 respectively per aid.  ME-1 appears to be very similar to the Siemens BTE Life 701 which is sold on-line for $1710 including a 3-yr warranty and loss/damage insurance.

Walmart contracted with Amplifon to staff Hearing Aid Centers in Walmart’s 4000 stores.  Amplifon, a public company headquartered in Milan, Italy, describes itself as a “world leader in hearing aid distribution.”  Amplifon owns 100% of Miracle Ear, Sonus, and the hearing centers in Walmart. They are affiliated with Beter Horen (Dutch), Elite Hearing Network, National Hearing Care, and Bay Audiology.

Who are the manufacturers of Amplifon Hearing Aids?  They purchase manufacturers around the world to build the products they want to distribute. Here are three examples which are probably the tip of the manufacturing iceberg.
1) Jan 16, 2012 
   …TURKEY - Amplifon SpA of Italy, a majority-owned subsidiary of Ampliter NV, acquired a ##% interest in Makstone Isitme Urunleri Perakende Satis Pazarlama AS, an Istanbul-based manufacturer and wholesaler of hearing aids, for an estimated TRY #.### mil…
2) Jul 25, 2006 
   GERMANY - Amplifon SPA (AS) of Italy, a unit of Ampliter NV, acquired AUDIMED GMBH Hoerzentrum, a Munich-based provider of hearing aid devices and services. Concurrently, AS acquired Schnabel.…

3) Jan 09, 2006 
   GERMANY - Amplifon SpA of Italy acquired the entire share capital of Dr. Haehle Hoerakustik GmbH, a Cottbus-based manufacturer of hearing aids.…

In addition to the Hearing Aid Centers, Walmart sells “over-the-counter” sound amplification systems.  Their most expensive item is priced at $999/pair and is a SimplicityTM  Hi Fi EP Hearing Aid Pair made by General Hearing Instruments, Inc., 175 Brookhollow, Harahan, LA 70123. (www.generalhearing.com).  The user manual states that it has a manual volume control but also has an automatic gain control around the set volume level as well as some compression to reduce the amplitude of loud sounds and increase amplification of soft sounds instantaneously.

Online Purchases
The web allows one to purchase hearing aids and sound amplifiers with qualities from excellent to awful.  The major and important drawback is the lack of personalized fitting and adjustments.

For higher-quality aids, one may go to http://www.discounthearingaidsofamerica.com.  As of January 30, 2012 it carried: Siemens, Rexton, Resound, Microtech, Phonak, and Starkey among others. It dropped two quality brands, WIDEX and OTICON because these companies claim they no longer sell to distribution lines that do not have face-to-face specialists as part of the pre and post-delivery service.  Sample prices per aid are: Phonak ($1000-$2100), ReSound ($1500-$2100), Siemens ($1100-$2100), and Starkey (“Too low to show, please call”.).  In spite of their website claim, WIDEX and OTICON could be found on http://www.discounthearingaidsny.com/Home_Page.php

For mid-range quality of mail-order choices, the author ordered two MDHearingAid Pros ($179 each).  This aid had 258 reviews on Amazon.com and 214 of them rated the aid with 5 out of 5 stars, a rare positive ranking for any kind of item! Amazon no longer carries these aids. They can still be purchased directly from mdhearingaid.com.  It is an analog sound amplifier with very good fidelity, forward facing microphone, and a manual volume control. When an audiologist saw it, she said it was similar to a 1980’s Starkey design.   People with a hearing loss over the entire frequency spectrum are benefited with its choices of relative flat or positive slope spectral responses. The author has high-frequency hearing loss.  He needed to over-amplify the mid and low frequencies to an intolerable amount to amplify the higher frequencies to his satisfaction. The author returned the aids and quickly got his money refunded.

On the low end of the mail-order business, the author purchased Invisi-Ear sound amplifiers for $20 each just to see what they were.  The author’s aids did amplify sound but also had 4 (left-ear-aid) and 5 (right-ear-aid) buzzing resonances over a range from 100 Hz to 1500 Hz that greatly distorted the sound. The engineering and fidelity were worth less than $20 to the author. On Amazon.com there were 6 reviews at the time of this writing: three gave it 5 out of 5 stars, and three gave it 1 and 2 stars out of 5. 
Mail-order sales from the web or print media provide lower prices. The ones that sell programmable frequency response hearing aids ask for your audiogram and program a factory-selected frequency response for that audiogram before mailing the aids to you.  A major failing of mail-order buying is the important face-to-face interaction and subsequent adjustments of the hearing aids over a number of appointments to best satisfy the customer.

Private practices as a group offer the most variety of quality aids and generally require the highest retail price for those aids.  Businesses with multiple outlets have the advantage of efficiency, scale and better contracts with manufacturers.  With the exception of the VA, the multiple outlet stores mostly carry aids from only one or manufacturers.  All multi-outlet businesses studied in this paper carry Siemens, sometimes others also carried REXTON (owned by
Siemens) and ReSound.  The multiple outlet stores tend to have “Private Models” in that they are a bit different from models sold anywhere else.  For example Miracle Ear has the ME-1 which is like but not identical to the Siemens Life 701.  Costco has the ReSound Future which is somewhere in the ReSound Alera category, but specific comparisons are not divulged.

What are the pressures to keep hearing aid prices high? Lack of a competitor that sells aids which are both profitable for the company and equitable for the customer.  Premium aids could be sold between 25% and 50% current private practice prices with ample profits for manufacturers and distributors. 

The great variation in volume of sales should be a key factor.  Multiple outlet organizations can negotiate better contracts with suppliers, pool advertising and use web-based shared accounting systems. Costco sells aids at about half the price reported in private practices.  However HearUSA and Miracle Ear have prices similar to private practices. 

Private practices may raise their retail prices to offset low volume sales only to drive more customers to not use hearing aids or go to Costco or the web.  As a result of lower volume, private practices tend to raise prices higher, continuing the self-defeating cycle.  They argue that they have higher quality aids and better service than multiple-outlet stores and that this justifies the higher price. However in the author’s opinion the licensed specialists in the multiple-outlet stores discussed above were good and were able to help their customers hear as well as possible with the limited products they sold. 

Manufacturers of recognized, top-quality hearing aids are very profitable.  The mark-ups in the distribution chain are large.   Bundled fees obscure the separate provider prices of the hardware and services.   The $350/aid price negotiated by the VA shows how low premium hearing aids can be purchased from a number of manufacturers.  In an earlier post, I show that the cost of producing (materials and labor) a premium hearing aid is only $250.
Appendix A.
Sketchy Analysis of Costco Hearing Aid Centers
Many of the numbers below are estimates and give only an idea of the profitability of the Costco hearing aid centers.

Average Number if aids sold per month:  80
Average consumer price of an aid: $1,150
Average Revenue per year: $1,104,000 for one center

Expenses of a Costco Hearing Aid Center operated 6 days/week
2 audiologists:           160,000 (Each works only 5 days a week)
1.2 Receptionists        43,200
0.25 Bookkeeping      11,000  (Assume center shares Costco’s bookkeeping                                                                 system)
Rent                              10,000  (Cost of not using space for something else)
Equipment                   15,000  (Testing equipment, software, demo systems, …)
Advertising                   10,000  (Share with Costco advertising program)
FICA and benefits       47,124  (Social Security, Medicare, Health Ins., Retirement)
Total Expenses      $311,324          

Net Yearly Profit      Net Yearly Profit          Assumed    Profit/Revenue
One Center               420 Centers     Cost of Aid
$456,676                   $191,803,920                        $350               41.4 %
  360,676                       151,483,920                         450               32.7 %
  264,676                       111,163,920                         550               24.0 %
  168,676                         70,843,920                         650               15.3 %

Costco may buy over 400,000 hearing aids each year.  They buy from two manufacturers while the VA uses six.  The assumed cost of aid (above) varies from VA cost to almost double that cost. Costco orders hearing aids from the manufacturer as they sell them to customers. The manufacturer drop ships the aids to the center.

Tuesday, October 2, 2012

Dispensing - Profit vs Quantity and Efficiency

Private practices make $4000 or more profit off of each pair of premium aids.  Why do they mark them up so high? Because we accept that price and have no other place to go to purchase an assortment of quality aids.  There are 1000s of hearing aid dispensers (Audiologists and Hearing Instrument Specialists). Many sell less than 20 aids per month. To make a living, they need a high profit per aid. This post analyzes a hypothetical company NEWCO to find out what characteristics such a company needs so that it is profitiable while being equitable to its customers. 

Can a company that sells the same premium aids used in the VA, has a volume similar to the VA (560,000 aids/year) and has the same or better service as the VA and private practices, sell those aids and services at 25% to 50% the prices demanded by private practices?

This post describes a hypothetical company (call it NEWCO) and compares Profit/Loss sheets of it and Status Quo practices.  NEWCO has a central facility that negotiates contracts with manufacturers, handles national advertising for the franchises, supplies accounting and customer relations software (web-based) to the franchises, trains franchise staff, and makes sure uniform pricing and services are provided to customers.   The analysis assumes the negotiated, factory price for a premium hearing aid averages $350 each – a little over the average price recently offered to the VA by a number of the best manufacturers (1, 2).

The franchises are full service.  They have a VA-range of hearing aids to best fit physical and acoustical needs of their customers.  The staff provides hearing exams, fitting, and adjustments as needed.  They also run a support group that meets alternate weeks.  Attendees learn from invited experts in the field of hearing loss, share experiences and insights with each other, and talk to attending franchise staff members.

The franchises are unbundled.  They charge $100 for the hearing exam (1 hour), $100 for the selection and fitting (2 hours, possibly two visits), and $50 for each 30-minute adjustment and extra visits (30-minutes) as needed.   If one wants to join the biweekly two-hour support group (and one can do it anytime) -- it costs $50/year.  The cost for one exam, one fitting, three adjustments and two selected hearing aids is charged up front. If the customer returns the hearing aids within the trial period, she gets a full refund less the cost of services rendered.

Comparison of Profit/Loss Statements Shown Below
The revenue and expenses of the status quo and NEWCO are compared when NEWCO charges 25%, 50%, and 100% of status quo prices.  For example, in the Quarter-Price Column of the analysis below, the customer pays $1,530 for two premium aids, exam, fitting, and three adjustments, approximately 25% the price offered to the author by private practice audiologists.

The fourth column “Status Quo” assumes bundled, current prices.  Income is totally from aid markup.  In all cases, the analysis assumes the corporation or buying group purchases approximately 560,000 aids per year – the same number recently purchased by the Veterans Administration (2).  The 560,000 aids represent 25% of the current number of aids purchased in the non-VA U.S. market or 6.25% of the aids that would be purchased if all who needed them purchased them.

For a franchise to sell 916 aids a year, I assumed the following activities:
1) Each customer purchased two aids meaning 458 customers purchased aids.
 To do this:
            a) 641 hearing exams were given
            b) 609 fittings were performed along with 1827 adjustments
            c) 305 additional visits were performed
            d) 25 two-hour support groups were led by two staff members.
The total number of staff hours to do the above were 3025 out of 5040 possible which meant each audiologist or technician spent 4.2 hours per working day with a patient.  A year is considered to be 48 weeks of 7 hours/day, 5 days/week.

b) Typical Audiologist Private Practice
The analysis assumes the buying group sells a premium aid for $1000.  Discounts and kickbacks are not considered.  The private practice sells aids for $3150 each.  They sell 300 aids/year per outlet, but with the high markup they still get sizable salaries of $179k for the lead audiologist and $74k and $62.6k for the two hearing-aid technicians. A more typical staffing is two audiologists with the second one earning the sum ($137.3k) of the two tech salaries. This means more contact hours for the two audiologists but since the outlet is selling only 300 aids, the contact hours are 1.3 hours/day each for 3 staff members or 2 hours/day each for a staff of 2.  This assumes they sell to 150 patients in one year, give 211 hearing exams, 200 fittings, 600 adjustments and 100 extra visits.  They do not offer a support group and thus do not spend the extra 100 staff hours as do the NEWCO franchises.

Major revenue and expenses are categorized. Other expenses, including bonuses and distributions to stakeholders, are placed in Unallocated Expenses.

The Profit/Loss Statement Description in more detail
The Quarter Price Column
In the 25% Price column the corporate facility buys aids for $350 each and sells them to the franchise for $385 each.  After paying $4.9M in salaries to corporate employees, $200,000 rent, $5.4M in national advertising, $1.3M in payroll taxes and employee benefits, it still has $7.8M in unallocated expenses most of which is reinvested for growth/maintenance and distributed to owners.

The 613 franchises buy the aids for $385 each and sell them for $565 each. They also charge for their services of exams, fittings, adjustments and other hearing issues that benefit their customers.  The revenue of each franchise (assuming it sells 916 aids to 458 customers over one year along with services) is $451,180. The lead audiologist makes $120,000 per year plus $14,425 in retirement and medical benefits.  The salaries of the staff total $270,476.  After the common expenses of rent, equipment purchase/repair, advertising, salaries, payroll taxes, and benefits, the franchise has $11,111 for reinvestment and profits.  This may be on the lean side.  Let’s look at the statement for a NEWCO where the customer gets services and aids for half the price charged in private practice.

The Half Price Column
In this case corporate sells the aids for $600 each and even after paying significantly higher salaries, corporate now has $140M available for unallocated expenses including reinvestment and distributions to owners (stakeholders).

The Franchise pays $600 for the aid and sells it for $1,375 as well as charges for its services. In this case the lead audiologist gets $282,515 in salary and $32,902 in retirement and health benefits.  The rest of the staff gets more as well. The expenses allowed higher rent, equipment costs, and advertising charges and still has unallocated expenses of $26,912. The salaries are on the cushy side.

The Full Price Column
The profits and salaries are outrageously high.

The Status Quo Column
The buyer’s group purchases hearing aids for $350 each and sells them to the private practice for $1000 each.  The revenue for the buyer’s group is $364M and has unallocated expenses of $352M for reinvestment and distribution to stakeholders. One may argue that the buyer’s group cannot negotiate as well as the VA even though they are buying the same volume under the similar distribution rules. Even if the buyer’s group paid $700/aid their net revenue would be $168M. This would cover expenses with a lot leftover for the stakeholders.

The private practice pays $1000 for an aid and sells it for $3150.  No additional charge for services.  If a private practice of two audiologists and support staff sold to 458 customers a year (The NEWCO number of customers/franchise), the two Status Quo audiologists would have to each work 6.1 hours/day and each make $706,000 per year including benefits. They don’t attract that many customers.  In this analysis we assume 1870 practices each selling 300 aids/year (150 customers) and the salary of the lead audiologist to be $179,000.  It is interesting to note that in this case a practice with two audiologists selling 300 aids per year only requires 2 hours/day for each audiologist.
The NEWCO salaries and profits are ample when selling premium aids and full service to consumers with retail costs between 25% and 50% of the Status Quo offerings.  The existing dispensing system burdens those who wear hearing aids and adds further deterrence to 75-80% of those needing aids from purchasing them.   The excessive cost is magnified by the fact that aids last only 4-5 years.

Comparison Profit/Loss Statements

Sunday, September 30, 2012

Hearing Aid Costs - Consumer View

Premium hearing aids are sold to the Veterans Administration for less than $350/aid from leading hearing aid manufacturers around the world.  For private practices, Audiologists purchase premium hearing aids either directly from the manufacturers or from buying groups. They generally pay less than $1000 for each aid. Audiologists then mark up the aid and sell them to customers for $3000.  For a pair of aids audiologists receive $4000 above the cost of the aids for their services.  It takes an average of 4 hours to test, fit, and adjust aids. In that case, audiologists are charging $1000/hour.

What makes the high price worse, is that on the average, aids last 5 or less years and customers get to buy aids again, generally at a higher price than before.
The manufacturer's price of aids is hard to find. My first clue was in a PowerPoint presentation by Lucile Beck, Director of Audiology and Speech Pathology Service, Veterans Administration (Slide 16)

She gives the number of aids the VA purchased over the previous years and the average price the VA paid for the aids ($348).  I later read a report from "The Hill" newsletter that said the VA purchased aids from Phonak for an average of $333 each in an ongoing government contract lasting to 2014. 

What kind of aids does the VA use? "Aids" can be purchased for $20 on-line that are tiny amplifiers that may or not have a number of distortions and no features commonly found in "Premium Hearing Aids." According to audilogists I questioned, the VA uses "top of the line" hearing aids. 

The following paper lists features tested in VA hearing aids including:
Digital Signal Processing, Feedback Suppression Noise Reduction, Wireless Technology (non-FM), Automatic Functionality, Data Logging, Acoustic Telephone Program, Music Program, Programming Software, Adaptive Directionality, FM System, Volume Control, Integrated Real-Ear, Telecoil, and Remote Control.  Description and Test Results of VA Hearing Aids

The high cost of hearing aids are NOT due to production costs. The average production cost is $250.  The high cost of hearing aids is due to the combination of the $750 markup f rom the manufacturer/buyer's group and the $2000 markup from the private practice audiologist.

Below is a comparison of the cost breakdown of a hearing aid and iPad.  It was written based on (1) an article in the Economist discussing the cost breakdown of making and distributing an iPad, (2) a German government article discussing (in English fortunately) the cost breakdown and profits of Phonak and other manufacturers required as part of a merger request. This paper first appreared on a blog hosted by Patrick Frueuler.

15 May 2012

Why Does a Hearing Aid Cost Six Times More Than an iPad?
Ed Belcher 1    and    Patrick Freuler 2

This guest post was contributed by Ed Belcher, who put together this eye-opening, neat piece of analysis.

Did you ever wonder why a hearing aid can cost up to 6x more than an iPad? Peeling the onion on the cost structure of both devices reveals an eye-opening comparison into the dynamics of either industry. It can provide us with pointers on where the future price and cost tags could shift and should.

Hearing Aids vs. iPad

Let’s assume a high-end hearing aid costs $1000 to the audiologist when he/she buys it from the manufacturer and consequently gets sold for $3000 to the consumer. Now if you dissect the $3000 based on a study by the German Competition Regulator, the following total cost breakdown emerges:

                                         $           %Total                                                                                                
Production Costs             250             8%
R&D                                   75             3% 
Marketing                          250             8%
Overhead, Profits             425           14%
Retail                              2000            67%
Total                               3000          100%

Now, let’s take a closer look at the iPad: a recent study at the University of California, Irvine took a closer look at the cost structure of a regular iPad and came up with the following segmentation:

                                                                 $         %Total iPad
Production Costs                                   275           55%
R&D, Marketing, Overhead, Profits        150           30%
Retail                                                         75           15%
 Total                                                       500          100%

Bear with us, as we plot these numbers on a chart:

The_manufacturing and distribution costs of a hearing aid are upside-down in comparison to the manufacturing and distribution costs of an iPad.

The iPad is subject to hard, unfettered competition. Its manufacturer profit, marketing, R&D and dispensing costs combined take up 45% of the retail price.  The production cost takes the balance (55%) of the retail price.

Most hearing aids are made by the Big-6 consortium which shares patents and does business in a mutually beneficial way.  The dispensing businesses sell the aids at a price around 3x their wholesale cost.  In that case, the production cost of a hearing aid comprises only 8% of its bundled price.  The remaining 92% is made up mostly of dispensing fees, administration salaries, and profits.

Granted, the market structure is different for both products. For instance, the sheer sales volumes of iPads far surpass those of hearing aids: Apple sold 3Mn iPads in the first 72 hours of its recent launch. By contrast, 3Mn units are what the entire hearing aids industry sells in one year. This sales volume allows for different economies of scale, especially when it comes to retail.

Furthermore there is a more involved service component attached to hearing aid dispensing (however not as much as what is traditionally claimed). Hearing aid dispensing, based on personal experiences when shopping in varied businesses for hearing aids, took 1 hour for the exam and discussion of HA options; 1 hour for fitting and training; and up to 2 hours for up to four 30-minute adjustments/training, a total of 4 hours of contact time. Assuming $100 per hour, consultation should yield a total of $400 in dispensing service fees.

In any case, the comparison is still startling and should raise questions on whether the industry is really operating at its most favorable level for the consumer. Let’s look at the next piece of analysis.

What would a hearing aid cost if it had the iPad cost structure? 
The aforementioned hearing aid that a dispenser buys for $1000 costs about $250 to make, as we saw with the previous example. So we start with the $250 production cost.

If the iPad-structure were followed based on the $250 production cost (i.e. 55% of the total) then:

-          the final retail price for one hearing aid would be $250 / 0.55 = $455

-          If the specialist sells two aids for $455 each and adds $400 for four hours of service, a pair of high-end hearing aids would have a price of $1,310

Let’s pause here and put this figure into perspective: $1,310 is equivalent to 22% of the traditional $6000 for the same pair!

What does this calculation imply on the audiologist revenues per customer? The $455 retail price includes a 15% markup (same as the iPad) of $68.25/aid. The total proceeds to the dispenser is 2*$68.25 + $400 = $537 for each customer served.

The questions that remain are thus:
1.      Can industry prosper and sell aids for $387 (0.85*$455)?  After all, they have sold millions of aids to the VA with prices decreasing from $375 to $333/aid from 2004 to 2011 respectively, according to Lucille Beck, Director of Audiology, VA, and The Hill

2.      Can a specialist prosper with a 15% commission for aids sold and with a $100/hour rate for services (normally 4 hours) during and after the sale of the aids (i.e. $537 of proceeds per customer)?

Tell us what you think; we would love to hear your opinion!

1  Ph.D. EE, Career researcher (retired) in underwater acoustics at the University of Washington